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Dry Bulk Shipping

December 24, 2019

Breakwave Dry Futures Index: 1,032 Baltic Dry Index (spot): 1,103 Short-term Indicators:
↓ 30D: -21.5% ↓ 30D: -14.1% Momentum: Negative
↓ YTD: -13.7% ↓ YTD: -13.2% Sentiment: Neutral
↓ YOY: -13.9% ↓ YOY: -13.8% Fundamentals: Neutral

Bi-Weekly Report

• IMO 2020 in full throttle mode – The gradual “roll” of the embedded fuel cost on time charter equivalent (TCE)
earnings has been having a detrimental effect on rates as implied compliant fuel (VLSFO) prices are now more than
2X higher compared to High Sulphur Fuel Oil (HSFO) prices that have now collapsed close to all-time lows (relative
to crude oil). Although voyage rates (rates that include the cost of fuel) have declined only marginally, the
considerable jump in fuel have pushed rates to six-month lows. Capesize rates are currently averaging below
15,000/day while Panamax rates are about 9,000/day.

• 2020 is starting weak, in line with comparable levels of recent years – Although the market has failed to
sustain the last several months’ strength, it is still entering the new year at relatively healthy levels, considering that
the first quarter is historically the weakest period of the year. We anticipate a rebound in early January, as charterers
return after the holiday break, and an average rate of ~15,000/day achieved for Capesize vessels during the first
quarter will be a significant win for shipowners, given all the headwinds the industry is facing.

• Global economy performing well – Although one can always find several negatives when it comes to economic
activity, the global economy in general, and Chinese economy more specifically, are showing signs of resilience. As
a result, we expect iron ore imports to China to remain roughly at 2019 levels, with some small growth likely and
highly dependent on the specific iron ore market fundamentals. Coal remains the wildcard it has always been, and
we don't anticipate much change from 2019 levels when it comes to trade volumes. Grains should improve year-
over-year and should experience decent volumes. Nevertheless, grains remain a small part of the overall dry bulk
freight market.

• High fuel prices should lead to slower steaming speeds – The IMO 2020 impact on fuel costs should lead to
slower steaming and thus lower overall ship supply, all else being equal. As such, the demand/supply balance for
shipping in general and for dry bulk more specifically, should tilt towards stronger rates. However, such impact
should be marginal, in our view, and not enough to cause a major change in freight rates. Volatility though once
again will remain significant and in line with recent years.

• Environmental concerns front and center for shipping – For shipping, developments as it relates to carbon
emissions are rapidly becoming a very important matter. Although for years such concerns would be just a topic for
a longer-term discussion, major charterers are pushing the environmental agenda much faster than the industry can
absorb. Such issues will continue to limit new ship ordering as the combustion engine technologies of the future are
still debatable and highly uncertain.

The Baltic Dry Index (BDI) measures the average spot rates for dry bulk freight with a sector weighting of 40% Capesize, 30% Panamax and 30% Supramax.
The Breakwave Dry Futures Index (BDRYFF) is designed to track freight futures contracts with a sector weighting of 50% Capesize, 40% Panamax and 10%
Supramax and a weighted average maturity of approximately 50-70 days.
 Baltic Dry Index vs Breakwave Dry Futures Index
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BDIY BDRYFF
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Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

Dry Bulk Fundamentals

Demand YTD YOY
China Steel Production 904mt 7.0%
China Steel Inventories 3.0mt 2.6%
China Iron Ore Imports 968mt -1.0%
China Iron Ore Inventories 129mt -5.6%
China Coal Imports 297mt 9.8%
China Soybean Imports 79mt -4.0%
Brazil Iron Ore Exports 312mt -13.6%
Australia Iron Ore Exports 688mt -1.3%

Supply
Dry Bulk Fleet 873dwt 3.8%

Freight Rates
Baltic Dry Index, Average 1,354 0.1%
Capesize Spot Rates, Average 18,040 9.1%
Panamax Spot rates, Average 11,120 -4.6%
Note: All numbers as of latest available; Sources: Bloomberg and Breakwave Advisors

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the dates specified and may have been and may be subject to change without notice. Email: research@breakwaveadvisors.com